The Courts have the power to grant ineffectiveness orders - and they’re not afraid to use it

Lightways (Contractors) Limited v Inverclyde Council [2015]

On the 1st December 2015, the Scottish Court of Session granted an ineffectiveness order, under Regulation 49(5) of the Public Contracts (Scotland) Regulations 2012 (the “2012 Regulations”), against Inverclyde Council (the “Council”), invalidating a call-off contract made under a framework agreement following a mini-competition for street lighting services. It is the first recorded use of the ineffectiveness remedy in a UK court since the remedy was made available in 2009. A similar remedy is available in England and Wales under Regulation 99 of the Public Contracts Regulations 2015 (and Regulation 47J of the PCR 2006).

In this post, we summarise why the Court made the order and what public authorities can do to ensure they don’t run the same risk as the Council.

The Facts

The Council awarded a call off contract for street lighting services under Lot 9 of its framework agreement to Amey Public Services LLP (the “LLP”). The same mini-competition in 2013 also led to an award to the LLP.

Lightways (Contractors) Limited (“Lightways”) challenged this award on the basis that the LLP was not a party to the framework agreement. The company listed on the framework agreement was actually Amey OW Limited (“OW”) a company in the same group as the LLP. The companies were very different, with OW having no presence in Scotland.

The Council argued that this was a mistake, but that it had intended to award the contract to OW, and that the same terms had been applied to the contract with the LLP as would have been applied to OW. It further argued that an order of ineffectiveness would be against the principle of proportionality and that the mistake could easily be rectified by novation of the contract to OW from the LLP. Finally, it argued that Lightways had no standing to bring the challenge, as it was not a party to the framework agreement.

The Decision

The Court held that Lightways had standing to bring the case because parts of its argument related to whether the mini-competition ought to have been procured by competitive tender.

Further, it was held that the Council had breached Regulation 19(3) of the 2012 Regulations in that the contract was awarded by the Council to a company which was not a party to the framework agreement. There was no defence to the Council’s actions and its proposed rectification would only result in a further breach given OW had not tendered for the contract in the first place. The principle of proportionality was not relevant as it cannot be used by authorities to defend against breaches of their procurement duties.

The Court asserted that this was not merely a clerical error, as the Council had intended, on a mistaken basis, to award the contract to the LLP and, further, had done the same in 2013. The Council had no other defence and so the Court declared that the contract was ineffective. The Council has been granted leave to appeal the case.

Interesting Points to Note

It is important to note what little discretion the Court has in deciding whether or not to grant an ineffectiveness order. Under Regulation 49(4) of the 2012 Regulations the Court must make an order of ineffectiveness if satisfied that any of the grounds apply. Although there are exceptions to the grounds, these are very limited and prescriptive. The courts do have discretion under Regulation 49(12) to not grant an order if they are satisfied that there are overriding reasons relating to a general interest why an order should not be granted, however this is only in the case of disproportionate consequences. Even then, if the Court does not grant an order of ineffectiveness then it must make an order shortening the contract and/or imposing a penalty.

It is interesting to note that due to this lack of discretion, the Court had no other option but to grant the order. Yet, had the circumstances been different and had the Council awarded the contract to OW, the correct company, and OW then went through a corporate restructuring and transferred the contract to the LLP, it is far less likely that the courts would have ruled this a substantial modification to the contract and any challenge would have had far less chance of success. More practically, the chances of a challenge at that point would have been far less likely.

What else could the Council have done? An option would have been to have published a standstill notice. This is voluntary for a call off from a framework, but had it done it and no challenge come forward during the standstill period, then the contract would have been immune from ineffectiveness. Furthermore, as Lightways is not on the framework agreement, it would not have been entitled to receive the standstill notice and so would not have been alerted to the contract decision and consequently is less likely to have brought the challenge.

What can authorities take from this decision with future procurements?

Authorities should take this case into consideration when considering the risk surrounding directly awarded contracts. Parties may previously have been sceptical that courts would ever actually grant an order for ineffectiveness but this case shows that courts are willing to use the remedy when appropriate.

Authorities should be careful when using framework agreements. When holding mini-competitions, ensure that the correct parties (to the framework agreement) are involved in the mini-competition and then check that the right party is awarded the contract. This is particularly important when dealing with companies that are part of group companies with similar names.

Authorities should not rely on past actions and mistakes to avoid any application of the remedy. As this case shows, although an error may have gone unnoticed previously, such as the award to the LLP in 2013, it does not mean that the same will happen again in the future.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Michael Mousdale

Partner - Head of Local Government

A Partner at the firm and Deputy Head of the Public Sector team, I specialise in local government and public procurement matters.